What does the future hold for UK house prices?

UK Real Estate has been the latest sought after long term investment by investors from the Emerging Markets. As the market grows crowded, however, they are taking a more granular approach to it, seeking low-leverage opportunities in supply constrained sectors. The residential sector in particular is garnering investor attention, as demographic trends and government policies point to strong fundamentals in the short and long term. Of the many facets of the residential sector, the provision of consented land to the house-building industry, offers perhaps the best opportunity.

After the fallout of 2008 – 2009, UK real estate quickly became a target for emerging market investors, especially from Asia, and in recent years the market has solidified its standing as a top destination for global investors in general. According to the recent Global Investor Appetite Survey, published by Nabarro, a global real estate law firm based in the UK, 73% of the 600 investors interviewed were likely to increase their allocations into UK real estate in the next two years.

Investment is coming from all parts of the globe, but Asian investors have taken the lead since the last financial crisis. A recent feature in the Financial Times highlighted the emergence of these investors, and the surprising role of Malaysia in particular. “Malaysia has emerged as the second largest investor into UK real estate in recent months. The size of Malaysia’s pension funds, relative to their domestic stock and bond markets, has encouraged them to look overseas and the UK has been a primary beneficiary.”

They are being joined by Brazilian pension funds which are looking increasingly at alternative asset classes abroad in response to low domestic fixed-income rates. Offshore orientated Chinese insurance funds bolstered by government policy changes, abundant liquidity and local currency appreciation are also increasingly looking offshore.

These investors are attracted to transparent re-emerging or developed markets such as the UK . In today’s global market place, wherever an investor is based, a sound investment proposition, wherever it is in the world, is something that will be considered.

Global investors’ taste for UK real estate can be attributed to such factors as the reliable legal system, strong education institutions, the convenient time zone, and low prices in the wake of 2008-2009, which is precisely when they began to enter the market more strongly. In addition, the UK real estate market boasts important fundamentals that distinguish it from other developed markets.

The recovery in the UK residential sector has differed from that occurring in either the EU or the US because of the unique political and demographic circumstances that are driving the market in England, particularly to long-term demographic trends. The UK’s population is expected to grow from 61.4 million in 2008 to 71.6 million in 2033, an increase of nearly 17%. At the same time, household density is set to fall from 2.3 to 2.15 persons per household between 2013 and 2033.

To meet this projected household growth, figures from the UK Government’s Department of Communities and Local Government suggest that 5.8 million housing completions are needed in England in the 25-year period between 2008 and 2033. An increase of 61% over the current level of housing completions will be needed every year in that 25 year period in order to meet that additional demand. To meet this demand, several stimulus measures were introduced in the budget of April 2013, including the “Help To Buy Mortgage Guarantee” scheme, the Help To Buy Equity Loans scheme and the Build To Let scheme. The results are already apparent, with home mortgage approvals up 25% since January.

Asset prices are also up, with house prices rising 5.4% in the year to August 2013, and the consensus is that this trend is gaining momentum, particularly for newly built homes. According to the Construction Register, newly built homes in the UK are more popular than ever before, while a recent survey by Halifax on house prices shows that new builds are outperforming the rest of the UK housing market, with an average value 9% above the norm.

But even as these policy measures stimulate demand, supply is nowhere close to meeting it. There is no way anytime soon that the sector will be overburdened by an oversupply of housing. The housing shortage in the UK is so acute that there is absolute cross-party political support for the need to increase housing supply and this is unlikely to change before the end of the next Parliament in 2020.

With demand outstripping supply by such a large amount, one of the major problems facing the sector is a shortage of consented land for the development of new homes. This will eventually drive house prices in the UK further.